Jan. 18--One of the first tasks state lawmakers face in returning to the legislature this month will be finding roughly $300 million to shore up a State Health Plan that takes care of more than 660,000 employees, teachers, retirees and their dependents.

The choices are obvious: Raise premiums, which are mostly covered by tax money; reduce health benefits; or both. Any option would be difficult, because lawmakers already face a $2 billion budget hole.

The health plan deficit threatens a major benefit for state employees. Unlike most workers in the private sector, state employees don't pay a share of their insurance premiums, though they do pay for dependents.

The legislature could shift more insurance costs to employees or cut their medical benefits. But that could discourage regular visits to the doctor and lead to more expensive, emergency care.

A state audit is under way to examine what went wrong with the health plan's finances. Interviews with key officials and health plan documents paint a picture of good intentions gone awry.

The plan's troubles started two years ago with the formation of a much more affordable health insurance option for state employees. It was supposed to pay for itself by negotiating cheaper rates with medical providers and by steering more employees and retirees to preventive care. But within months, documents show, the level of expected savings wasn't materializing, and lawmakers weren't made aware of the shortfall until it was too late to fashion a less painful fix.

"We thought everything was going well, and on projection, and then at the end of June we found out it wasn't," said House Majority Leader Hugh Holliman, a co-chairman of the legislative committee that oversees the health plan.

He and the other co-chairman, Senate Majority Leader Tony Rand, fired the plan's executive administrator, George Stokes, on July 1, two weeks after finding out about the plan's deficit. By then, the plan had spent $138 million more than budgeted. New projections showed the gap could grow to $264 million by June 30.

PPO option popular

Stokes built the new health insurance option, called a preferred provider organization plan, and state employees switched to it in droves. It is patterned after a popular Blue Cross and Blue Shield of North Carolina PPO plan, and the nonprofit organization handles the plan's medical bills and negotiates contracts with providers.

Stokes, who made a $167,872 salary, previously ran two HMOs in the Triangle for Kaiser Permanente and Doctors Health Plan. Both health plans failed. He took over the state plan in April 2005.

Stokes, in interviews, said he does not think he was fired over the missed financial targets. He said the shortfall was not significant in a plan that spends more than $2 billion a year.